In this method of cost accounting, all the costs incurred in the production of a service are added together. They are then divided by the total number of service units rendered. The total cost is then divided by the total units to arrive at per unit cost.

Example:

The total cost incurred in providing one bus trip is divided by the number of seats for passengers to arrive at the cost of each ticket.

This method of costing is used in railways, buses and other modes of transport, hospitals, hotels, public utility services (electricity, water and telephone) and any other organization where services are provided.

Since services are intangible entities, it is important to accurately determine their cost so as to be able to price them appropriately.

Illustration of Service cost sheet for a transportation entity.

Hence, this concludes the definition of Service Costing along with its overview.

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